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When should you take Social Security if you have a pension?
It’s one of the most common questions we hear from the retirees we work with at Peak Retirement Planning, where I am the founder and CEO.
The answer is often very different for people in what we call the 2% Club: Retirees who have both a pension and $1 million-plus saved (I wrote a bestselling book on this group — you can request a free copy).
About 20% of Americans have or will have a pension in retirement, and fewer than 10% have saved $1 million or more for their retirement. If you have both, you’re in a unique financial position that requires a more customized strategy.
Many retirees without pensions feel pressured to take Social Security as early as possible because they need the income.
However, if you already have a guaranteed income from a pension, your decision may be less about survival and more about optimization, specifically taxes, legacy planning and maximizing lifetime income.
Of course, there’s one joke I always make when this topic comes up: “Tell me when you’re going to die, and I’ll tell you exactly when to take Social Security.”
That’s ultimately what much of this decision comes down to. Since none of us knows the answer, there are several other key factors pension holders should carefully consider before claiming benefits.
Your health matters more than the math
The first major consideration is your health and life expectancy. If you expect to live into your 80s, 90s or beyond, delaying Social Security will often make sense in the long run. Every year you wait from age 62 to 70 gradually increases your monthly benefit, and in many cases, your age-70 benefit could be nearly double what you would have received at age 62.
The typical “break-even” point, when delaying benefits starts paying off, usually falls between ages 80 and 83.
If your health is poor, your family history suggests a shorter lifespan, or you simply want to maximize the number of checks you receive, claiming earlier may make more sense for your situation.
This is why there’s no one-size-fits-all answer. Two retirees with identical retirement balances and pensions could make completely different Social Security decisions based solely on health and longevity expectations.
If you’re still working, be careful
Many pension holders retire early, but not everyone does. If you claim Social Security before your full retirement age while still working, your benefits could be temporarily reduced if your earned income exceeds Social Security’s annual limits.
That can surprise people who planned to “turn it on” at 62 while continuing to work.
For retirees who stop working earlier, though, this often creates more flexibility and potentially more tax-planning opportunities.
Married couples need to think strategically
Social Security planning is even more important for married couples, and it’s crucial to understand how the two benefits work together.
One of the biggest factors is the survivor benefit. When one spouse passes away, the surviving spouse keeps the higher of the two Social Security benefits. That means delaying benefits can sometimes function as a form of longevity insurance for your spouse.
For example, if one spouse waits until age 70 and locks in a significantly larger benefit, that higher amount could continue for the surviving spouse’s lifetime.
This matters because of what many advisers call the “widow’s penalty.” When one spouse dies, the household often loses one Social Security check, but the surviving spouse will also move from married filing jointly tax brackets into single-filer brackets, potentially increasing taxes dramatically. Delaying Social Security can help soften that financial blow.
There’s also the spousal benefit to consider. A spouse may be eligible to receive up to half of the other spouse’s full retirement age benefit, even if they don’t have their own benefit to claim.
One thing to consider is that this benefit maxes out at full retirement age (66 or 67), and delaying past that will only increase your own benefit, not the spousal benefit.
Your pension changes the equation
For retirees with pensions, Social Security decisions often become more flexible because the pension already covers a large portion of living expenses. We see many clients whose pensions replace 70% to 80% of their working income.
Add Social Security and investment withdrawals on top, and they may actually earn as much, if not more, in retirement than while they were working.
This is why many pension holders choose to delay Social Security. Their pension can provide enough income to bridge the gap, allowing Social Security to grow larger in the background.
In some cases, retirees may temporarily withdraw from investment accounts between retirement and age 70, then rely less on those investments once larger Social Security benefits begin.
This can create more flexibility for future healthcare costs, travel, gifting or legacy planning later in retirement.
Taxes are often the biggest factor
For many high-net-worth retirees with pensions, taxes are the biggest consideration in Social Security timing. Many people assume they’ll automatically be in a lower tax bracket during retirement, but for pension holders, that’s often not true.
A pension creates a steady stream of taxable income, and because of this, we often see their Social Security benefits being the full 85% taxable.
You also have to consider any required minimum distributions (RMDs) from your tax-deferred accounts, which can push your taxable income even higher in retirement.
That’s why delaying Social Security can sometimes create a valuable “tax-planning window.”
For example, retirees who delay benefits until age 67 or 70 may have several years where income is temporarily lower before Social Security begins. During those years, they may have opportunities to:
Withdraw money from traditional IRAs at lower tax brackets
Perform Roth conversions strategically
Reduce future RMDs
Lower future tax exposure for surviving spouses
Roth conversions have become increasingly popular among retirees with pensions and large 401(k) balances.
Many retirees have spent decades deferring taxes into their 401(k)s and 403(b)s under the assumption that they’d be in a lower tax bracket in retirement. But pension income changes that equation.
Today’s tax rates are historically low by many standards, and a lot of retirees worry that tax rates could rise in the future. This has led some retirees to voluntarily pay taxes now through Roth conversions in exchange for more tax-free income later.
And if those Roth assets eventually pass to children or heirs, distributions can be received income-tax free, potentially reducing the tax burden on the next generation as well.
There is no perfect age
Retirees often want a simple answer: “Should I take Social Security at 62, 67 or 70?”
But the reality is that Social Security planning is deeply personal. The right answer depends on your:
This is why effective retirement planning should never rely on one-size-fits-all rules.
The good news is that retirees with pensions are often in a very strong position financially, and these are all good problems to have.
For many retirees in the 2% Club, retirement becomes less about whether they can retire and more about how to optimize the life savings they’ve worked so hard for — which is a great place to be.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
